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2 dividend stocks I’m buying for my ISA

Putting your shares in an ISA gives you an immediate advantage over most fund managers — you don’t have to pay tax. I like to focus my ISA on stocks I believe are likely to generate a lot of cash, most often through dividends.

One of the most recent additions to my personal ISA is fashion retailer Next (LSE: NXT). Shares in this one-time high flyer lost 45% of their value in 2016, as the firm’s growth ground to a halt. My view was that this sell-off was overdone, so I flagged the stock as a potential value buy.

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Results rally

Sure enough, Next’s share price rallied strongly after the company published its full-year results last week. The stock has now risen by 8% in March. The figures showed that Next’s sales were broadly flat last year. Importantly, the firm’s operating margin also remained unchanged, at 20%. Despite the difficult trading conditions, a total of £502m of surplus cash was returned to shareholders.

Looking ahead, Next’s guidance seems encouraging to me. In order to compete with fast-moving online retailers, Next is adapting its design and sourcing process to deliver new designs more quickly as trends develop.

An impressive 97% of the group’s stores make an annual profit of more than 10%, which is very good for a high street retailer. Payback on new stores is just 24 months, and rental rates are falling on new leases.

I believe that gloomy predictions about Next’s future are mistaken. The stock currently trades on a forecast P/E of 10.7 with a prospective yield of 4.1%. In my view this represents an excellent entry point for a high quality business. I plan to add more shares to my existing holding before the end of the tax year.

A dividend friend for life?

Pets are for life, not just for Christmas. But what about retailer Pets at Home Group (LSE: PETS), whose shares have fallen by 25% so far this year? The main trigger for the group’s slide was a 0.5% fall in like-for-like merchandise sales during the third quarter. This was seen as bad news by analysts, because merchandise provides about 80% of the group’s profits.

I don’t deny this is disappointing, but I don’t think it’s a disaster. Pets at Home’s group revenue still rose by 4.4% during the third quarter, as new stores were opened. Like-for-like revenue across the group was 0.1% higher. So while growth is slowing, pet-owning customers are staying loyal to the business.

Indeed, customer loyalty is a key attraction for investors, in my view. Pets’ strategy is to combine in-store vet and grooming services with online and in-store sales of pet merchandise, including premium own-brand products like food.

The group’s belief is that by offering a seamless mix of services and products they can build a loyal customer base and a profitable business. I agree.

With the shares trading on a forecast P/E of 11.8 and offering a dividend yield of 4.2%, I believe the stock is attractive. I’m planning to buy shares in Pets at Home before the end of the tax year.

But if you’re not yet convinced, I do have some other suggestions that could make ideal tax-free investments.

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Roland Head owns shares of Next. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.